If you started thinking about your retirement, you probably thought of Life Insurance Retirement Plan – LIRP.
Most people look forward to their days of retirement, especially if they had a busy business life. Spending time with your loved ones, having no worries, and enjoying your days of retirement is a pretty picture to have in mind.
There is only one thing missing in the picture – your retirement savings. To have the enjoyable retirement you deserve, you should start retirement planning as soon as possible. You could choose several retirement strategies from – Roth IRA, 401(k) plans, and similar retirement incomes.
However, one strategy stands out – Life Insurance Retirement Plan (LIRP). Life Insurance Retirement Plan is a strategy developed on your life insurance policy that keeps becoming the number one choice due to many benefits related to the death benefit, tax-free income, etc.
In this article, you will learn all about LIRP – Life Insurance Retirement Plan:
- What is a Life Insurance Retirement Plan
- What are the benefits of a Life Insurance Retirement Plan
- What are the downsides of a Life Insurance Retirement Plan
- What are the alternatives to Life Insurance Retirement Plan
We will also share with you how to fund an early retirement using cash value life insurance. Let’s begin!
What is a Life Insurance Retirement Plan?
The first question that popped into your mind must be – what is a LIRP? Luckily, we have an answer.
Life Insurance Retirement Plan – LIRP is a permanent life insurance policy that builds cash value over time. LIRPs are over-funded policies – meaning that they are created when policyholders pay the amounts above the premiums regulated by contracts with the insurance companies.
Life Insurance Retirement Plan is available with permanent life insurance policies, such as Whole Life Insurance, Indexed Universal Life Insurance (IUL), Universal Life Insurance, and similar insurance products.
One of the main characteristics of the LIRPs is that the cash value can be accessed with tax advantages to supplementing your retirement income. Funding a LIRP is a good match for everyone taking financial planning seriously, and it can bring you countless benefits, such as tax-deferred accumulation, asset protection, penalty, and tax-free distributions, etc.
How does Life Insurance Retirement Plan work?
All permanent life insurance policies include a cash value component that grows over time. Every time you pay a premium for your permanent life insurance policy, you pay a higher amount than required to cover the policy to ensure life insurance protection and build the cash value.
Any amount over the premiums is being stored as the cash value and accumulated over the years. Growth in the cash value is tax-deferred, which means that you would be able to accumulate a significant amount over many years.
When funding a LIRP, your cash value becomes the source of your supplemental income. You can access your cash value through policy loans or withdrawals – as you prefer. Both of these incomes would not be taxable in most cases. Let’s go through the details of this insurance product.
Benefits of Life Insurance Retirement Plan
There is a reason why many people choose whole life policies over term life insurance to afford themselves a tax-free retirement. Actually, there are several. We highlighted the most important ones you should have in your mind.
The LIRP ensures Guarantees and Safety
If you ask your financial advisor what the safest option for planning and managing your retirement accounts is, they will probably guide you towards the Life Insurance Retirement Plan.
LIRP offers you a dose of security and safety – both for you and your loved ones. One of the perks is the guaranteed tax-free death benefit. Not only will you be able to build your retirement savings, but also your loved ones would receive the death benefit with zero tax rate after you pass away.
An additional benefit is that the death benefit on a life insurance retirement plan can be structured in a way to increase each year, in alignment with your cash value growth.
LIRP ensures a floor to your investment returns, known as a guarantee. Having the guarantee means that you would never have a year in which you take a loss. The guarantee percentage depends on your product choice and allocation, but the bottom line is that you would never get less than 3 or 4%.
Entrepreneurial life
If you are an entrepreneur or are thinking of starting a business, a Life Insurance Retirement Plan might be the perfect option. LIRP allows policyholders to fund their own business without having to approach a banking institution.
When owning a LIRP, you can borrow the money against your policy, usually at close to 0% net cost, and pay it back with flexible terms. Flexibility covers paying a smaller amount or skipping a loan payment entirely, without penalties as consequences. Borrowing against your life insurance policy is a way better option than borrowing from the bank. Your insurer can confirm this.
Retirement Income in Life and Replacement Income in Death
With LIRP, you get the best of both worlds. As long as you live, you can have tax-free income from withdrawals or loans directly from your LIRP. This means that your Life Insurance Retirement Plan would enable you to maximize your retirement savings using the accumulated cash value.
In the case of death, the LIRP provides income protection if you can no longer give that retirement income to those you love. LIRP offers death benefit protection, meaning that your loved ones would receive a tax-free death benefit. This applies to the cases of an unexpected death, too.
Long-term care is an additional benefit. With Life Insurance Retirement Plan, you can add the long-term care and chronic illness riders to your policy. These riders are available within a LIRP for everyone who is permanently disabled, terminally ill, or needs long-term care. It doesn’t have to be a policyholder – it could be anyone from your family.
Many policyholders appreciate the peace of mind that LIRP enables, so many insurance agents choose to promote it amongst their clients.
Tax Advantages
Taxes can be nightmares – we are all aware of that. The good news is that the Life Insurance Retirement Plan can be tax-free.
The main point for you to understand is that the money in your cash value is the after-tax money, which means that you already paid some amount to the state. If you choose to borrow against your LIRP instead of withdrawing money, you will gain access to your money tax-free.
A vital component to mention is the interest rate. Whenever there is a loan, and you choose to borrow the money, you are expected to pay an interest rate. This rule applies when you are borrowing from a LIRP, too.
Please bear in mind that you also receive interest from your Life Insurance Retirement Plan, which means that your loan will probably end up being a 0% wash loan. These loans are often called wash loans because you earn what you pay, so it’s a wash.
No Penalties
What a relief! Just knowing that you wouldn’t be charged any penalties if it happens, you can not pay the premium or pay back the loan for that month is enormous stress relief. From this point on, you can be a much better financial planner and decision-maker.
When speaking about withdrawals or loans, you should know that they do not require you to be a 59.5-year-old man or woman (as many other retirement plans do) to access your funds. In case you need – or simply want to access your money, the IRS wouldn’t even know you did it. This means that you wouldn’t be charged any penalties or taxed for taking out the money.
Bear in mind that the LIRP brings you the safety of not pressuring you into paying back your loan with time limits or similar factors. Even if you change or lose your job, you wouldn’t be put in a situation to return the funds immediately.
Infinite Banking
Well, this is our favorite topic, and we will not refrain from highlighting this enormous benefit!
The concept of infinite banking is about strategically using your whole life insurance policy from a mutual insurance company as a personal endless banking system. In other words, Infinite Banking is essentially being your own banker.
One of the many benefits of a whole life insurance policy is that policyholders can borrow money using their policy’s cash value. Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking fees or interest rates on loans.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
The way infinite banking works allows you to mimic the way a bank operates and borrows money.
Instead of borrowing from a bank, you borrow from yourself while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
Whether it be for your child’s education, a downpayment on the house, or medical expenses, borrowing for yourself and being your own bank allows you the financial freedom and control of your money.
We will talk more about the Infinite Banking concept later, but the main message you should be taking from here is that you can fund your Life Insurance Retirement Plan by owning a whole life insurance policy, thus Become Your Own Bank.
Entering the Banking Business gives you much better control over your finances and helps you build wealth using the life insurance policy.
No Funding Limit
It is a refreshment to see that there is no limit when it comes to funding. No contribution limits mean that there are no limits on how much you can place into a LIRP, and there is no income threshold prohibiting you from funding a LIRP beyond what you can qualify for.
This is a big difference compared to other retirement strategies, such as the famous Roth IRA. As long as you buy a large enough death benefit (minimum non-MEC), you don’t have to worry about the funding limit.
Different applies of LIRP for different purposes
As we already mentioned, you can fund a LIRP by owning any number of permanent life insurance companies and policies, such as Whole Life Insurance, Indexed Universal Life Insurance (IUL), Universal Life Insurance, Variable Universal Life (VUL), etc.
Each of these life insurance types brings different pros and cons, and based on your goals and purpose – you can choose the life insurance policy that contributes the most to them. This means that you can have a level of flexibility in designing the LIRP according to your needs.
Downsides of the Life Insurance Retirement Plan
There are two sides to the coin, which applies to the Life Insurance Retirement Plan. Besides the outstanding benefits, there are some cons you should be aware of before you choose to fund a Life Insurance Retirement Plan. We highlighted the most important ones you should be aware of.
LIRPs are quite expensive
Unfortunately, not many of us would be able to afford funding a Life Insurance Retirement Plan. If you open any life insurance quotes, you will see that the LIRPs — as a type of permanent life insurance — are much more expensive compared to term life insurance.
Bear in mind that the higher price will cover some benefits you wouldn’t get with term life insurance. The number one example is the cash value. With LIRPs, you will be paying higher premiums, but the portion of those premiums would go to the cash value, bringing it over the years. This is a benefit you can not afford with a lower price of term life insurance.
Another essential thing to mention is that with the LIRPs, you will have level premiums – meaning that they will not rise over the years. On the contrary, term life insurance premiums will grow disruptively in the next 10, 20, or 30 years.
Whole Life Insurance has many benefits indeed. One of them is the paid-up additions. This option enables you to choose a whole life policy that offers the lowest death benefit possible, with the highest paid-up additions that you can quite safely afford.
This means that most of your premium will go into the cash value savings, while the smaller amount will cover the cost of insurance and insurance agent commissions.
It takes time for LIRPs to grow
They say that nothing good comes over the night. We believe that that’s the case with Life Insurance Retirement Plans.
Seeing the rate of return with LIRP is not encouraging, as it will only get 5% annually, making you believe you will never be able to retire. On the other hand, having an average of 10% return rate might feel much more appealing.
Bear in mind two things. First of all, this aspect is only comparing the rate of return without considering the taxes or accessibility to the money.
Secondly, you probably have several, if not many, years before retirement, and every year counts. Even though you may only get a guaranteed rate of return in a LIRP that is around 4%, that doesn’t mean that you will never get more. On the contrary, you will probably get much more; the guarantee is just a minimum amount you’ll get if the stock market starts tanking again.
It might require constant contributions
LIRP is being created by over-funding your policy – you’ve learned the theory. Some people find it tiring to constantly be able to set aside money and make contributions towards their retirement plans. Bear in mind this information and challenge your patience, as LIRP will most probably challenge it.
Requires Surrender Charge in the early years
Having a cash value life insurance is a good thing, as in the case of policy lapse or policy surrender, you get to keep the savings you have in the cash value, minus the surrender fee.
As you know that it takes time to build the cash value, you also probably know that you could expect a surrender charge in the case of a policy surrender in the early years. This is since the cash value is not big enough to cover the usual fees, so you would have to be charged additionally. Not to mention you wouldn’t have any savings to take with you.
Contributions are not tax-deductible
Many people choose not to go with funding the Life Insurance Retirement Plan because the contributions are not tax-deductible. This is a big downside compared to other retirement strategies, such as IRA.
Alternatives to Life Insurance Retirement Plan
There isn’t one size fits all retirement strategy. This means that the LIRP will not be the best option for everyone, especially when considering other factors, such as income or tax bracket. Luckily, there are alternatives to Life Insurance Retirement Plan that are more than satisfying.
IRA
IRAs are Individual retirement accounts that offer tax-deferred growth and allow you to spend all of the money stored in your account without paying interest on loans or worrying about a policy lapse. There is a particular type of individual retirement account, known as the Roth IRA. If you choose this retirement strategy and satisfy IRS requirements, your withdrawals can be tax-free in retirement.
Workplace retirement plans
One of the first things to consider when starting to work in a new company is what kind of a retirement plan they are offering. The most popular ones are 401(k) and 403(b) retirement plans. Compared to IRA, these plans allow you to save much more. You can also accumulate meaningful assets for tax-free income later.
Health Savings Accounts (HSA)
Health Savings Accounts (HSAs) might be a good option if you can qualify for contributions using specific high-deductible health plans. This will bring you benefits such as pre-tax contributions, tax-deferred growth, and tax-free withdrawals when used for qualified health care expenses.
Taxable accounts
Taxes do not have to be a nightmare, mainly if you apply one of the tax-aware strategies. In that case, you can choose a standard individual or joint investment account, which will give you total control over withdrawals and investments.
Annuities
Annuity’s top benefit is that they provide guarantees in the form of lifetime income. They also ensure tax deferral that might be helpful after you’ve maxed out other retirement programs.
Whole Life Insurance
You can’t have LIRP without permanent life insurance, but you can benefit from Whole Life Insurance without funding a LIRP.
There are countless benefits of Whole Life Insurance. The most important one is that you can implement the Infinite banking concept and become your own bank. Here are some of the most significant benefits you can expect from Whole Life Insurance – if you start Infinite banking.
Control
If you implement the infinite banking concept, you sign the contract with the life insurance company only. As you don’t have to deal with other financial institutions, the control of your finances significantly increases.
Cash Value
Infinite banking is not only applicable when it comes to paying off your mortgage. On the contrary, infinite banking can help you bring cash value over time and build your wealth. Every single time you make a premium payment, cash value accumulates inside your policy. The nice thing about having this cash value is that you earn a guaranteed 4% interest on this money. An additional benefit is that you can access the cash value any time you want and use it for any needs you have at the given moment.
Dividends
This is the non-guaranteed portion of your contract premium, which is the dividends that are paid to you. As long as you work with a mutual insurance company, you could be paid a dividend each year. At the end of the year, if the insurance company is profitable and paid all their expenses, whatever is left is returned to the policy owners in dividends. We call that return a premium. The IRS does not tax you on these dividends, which is another bonus point regarding whole life insurance and infinite banking concept.
Riders
Riders are additional features and benefits that can be added to your policy for your specific needs. For instance, if you add a terminal illness rider and you’re diagnosed with a terminal illness, a portion of your death benefit can be utilized to cover your medical expenses. This is similar to a chronic illness rider, both of which give you benefits you can use while you’re still alive.
Tax Benefits
Because you put in after-tax dollars into a whole life policy, the cash value grows at a tax-free rate. That means that for the whole time you have your whole life insurance policy, you aren’t going to be taxed on any of the growth or even the cash value you utilize, as long as you request a loan. This brings a dose of security since you can never predict taxes in the future.
If you are interested in learning more about the benefits of whole life insurance, make sure you check our video and read our article on this exact topic.
And if you are wondering how you could use the concept of infinite banking in your life, make sure you go through 10 Ways to Use Infinite Banking.
Final Thoughts
You’ve made it to the end of this article – congrats! You have learned everything about LIRP – Life Insurance Retirement Plan. You know the most significant upsides and downsides of funding a LIRP, and hopefully, you know if it is the right choice.
We believe that funding a LIRP is not a necessary option. You could gain all of the benefits – and the additional ones, just by capitalizing on Whole Life Insurance and the Infinite Banking concept.
If you would like to keep learning more about Whole Life Insurance and improve your finances, you can sign up for our premium membership. We are looking forward to seeing you at the Wealth Nation community!